Namely, they got a heads-up that Facebook's business had suddenly deteriorated.

This "tip" came in the form of sudden estimate cuts by the research analysts at Facebook's IPO underwriters, who were told by company management that the second quarter was falling short of expectations.

This information was then shared verbally with big institutional clients of the underwriters, but it was not published anywhere or shared with small investors or the public.

In other words, Facebook basically pre-announced disappointing second quarter results, but this information was only shared with a handful of the investors who were considering investing in the IPO.

The IPO was priced at $38, and a big percentage of the stock—25%, reportedly—was sold to small investors. For a day, everything went fine: Anyone who bought the IPO could have flipped it for a nice gain. But then, as many investors dumped shares and news of the business slowdown spread, the stock collapsed. It is now trading at $32, the price that well-informed institutions were said to be willing to pay for it.

Regulators will now look into whether Facebook's public disclosures and the underwriters' behavior broke any laws.

But irrespective of legality, obviously, this selective disclosure of critical information was grossly unfair.

Every investor on the planet deserved to know about Facebook's sudden business slowdown. And the fact that only a select group of institutional investors heard about it—verbally—is outrageous.

But, absurdly, these estimates are not shared with all investors. They're only shared with big investors. Which means that, even on a normal IPO, big investors have critical information that small investors don't.

On the Facebook IPO, because Facebook took the highly unusual step of changing its guidance in the middle of the roadshow, this unfairness became extreme.

Three days into the roadshow, Facebook filed an updated prospectus with the SEC. As we have noted, this document contained vague language about how Facebook's users were continuing to grow faster than revenue, but it did not say anything about sudden second-quarter revenue weakness.

Immediately after the filing, a Facebook executive called the analysts at 21 Wall Street firms and told them to cut their estimates. According to one person we talked to, this message was very explicit.

Meanwhile, the institutional sales forces at the underwriters fired up the phones and called their big clients to tell them about the estimate cut and revenue slowdown.

Not surprisingly, this news was taken as a significant negative by the investors, and many of them soon reduced their orders for Facebook stock or reduced the price they were willing to pay for it.

Some of these investors, including the powerful Capital Research Group, also found the later price increase for the Facebook IPO "ridiculous," especially in light of the estimate cut. Some Capital Group funds did not buy the IPO at all.

The fact that 1) Facebook called 21 underwriter analysts and told them to cut their estimates and 2) the firms of these analysts then verbally passed on this information to their biggest clients should eliminate any question about what happened here.

This was selective disclosure of critical non-public information.

Facebook's amended prospectus did not say that the company's business had suddenly weakened and management's outlook had changed. And that information is vastly more important than what the prospectus did say, which was that users are growing faster than revenue.

These new details should also make Facebook investors who didn't know about the estimate cut even more furious.

Wall Street and Facebook will presumably argue that they followed "all applicable rules," as Morgan Stanley said two days ago. If that is true—and, this should certainly be carefully investigated—the rules are obviously ridiculous. And they should immediately be changed.

Also, whether the letter of the rules may have been followed, the spirit of the rules clearly was not.

A company suddenly reducing its business outlook is highly material information. Every potential Facebook investor should have been immediately and clearly informed of that. And it would be laughable to suggest otherwise.